Directors and Officers Liability Market Firming: Towers Watson

The directors and officers liability market continued to see price increases in 2012, with more private/not-for-profit organizations reporting rate increases than public organizations but, according to a new industry survey.

Overall, the D&O marketplace is in a state of transition with firming rates, according to the 2012 Directors and Officers Liability Survey by Towers Watson.

The survey found the market shift was most evident in the private/not-for-profit space, where 41 percent of respondents reported an increase to their primary D&O policy premium, up from 18 percent in 2011.

Public companies saw an increase as well — some 29 percent reported an increase in premiums paid for their primary D&O policy, 15 percentage points higher than 2011.

The survey, which reflects D&O insurance arrangements and purchasing patterns, divided most responses into two categories: public companies (61 percent) and private companies/nonprofits (33 percent).

“Directors and officers, and their respective organizations, continue to be susceptible to a much wider range of claimants than in years past,” said Larry Racioppo, vice president, executive liability group, Towers Watson, and author of the survey. “Increasing claim activity, including D&O and employment litigation, coupled with inadequate pricing and retentions in the private and nonprofit space, are all driving insurers’ need for pricing increases.”

The survey found that directors and officers were more likely to inquire about the amount and scope of their D&O coverage than the previous year. This was particularly true among private companies where 70 percent of respondents reported receiving an inquiry as to the amount and scope of their D&O coverage, up from 58 percent in 2011. D&O inquiries among public companies edged up to 80 percent, a three-percentage-point increase from 2011.

D&O Claims

Thirty-six percent of participants reported claims against their D&O liability policies in the last 10 years, with nonprofits reporting the highest proportion of claims (63 percent).

The rising claim trend is significant, Racioppo says. “It contradicts popular opinion that D&O claim activity is solely a public company phenomenon,” he says. “Directors and officers of public, private, and nonprofit companies and their organizations all face the risk of litigation.”

Regulatory claims continue to be a significant source of D&O liability concern, with 83 percent of survey respondents ranking it as a top three concern, higher than all others.

Over the past three years, concerns over both regulatory and derivative shareholder/investor lawsuits have trended upward, with 26 percent and 17 percent, respectively, ranking these as their top concerns.

Direct shareholder/investor suits still register as the greatest concern among survey participants, though it has trended downward over the last two years.

“The increased concern over regulatory litigation may reflect new laws put in place since the financial crisis, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as an increase in whistleblower bounties,” Racioppo said.

One in five (21 percent) said they were dissatisfied with the manner in which their D&O claim was handled, a finding that Racioppo suggested may require a closer look.

“Reasons may be rooted in the complexities of the claim process or the need for better communication among all parties,” he says. “The finding belies the relatively low importance placed on claim-paying reputation when compared with other aspects of companies’ primary and excess insurers.”

Program Structure

Seventy-one percent of public companies and 50 percent of private companies/nonprofits indicated the scope of D&O coverage for their directors continued to be the consideration that survey respondents deemed most important in their insurance program. The scope of coverage for their officers is also a major consideration, with 73 percent of public companies and 62 percent of private companies/nonprofits saying it’s either the most important or second most important aspect of their D&O program.

Some 83 percent of public companies purchased Side A policies, according to the survey, and purchasing patterns for Side A policies among private companies continued to rise, with 41 percent including a Side A layer as part of their D&O program, an increase from 34 percent in 2011.

“What stands out is the growth in private organizations that maintain a dedicated Side A policy as part of their D&O program,” Racioppo said. “Such a meaningful increase is further evidence of a heightened awareness of the product’s importance.”

The survey revealed that the vast majority of participants (87 percent) purchase excess limits in addition to their primary D&O limit through at least one additional insurer.

When asked to rank the importance of various characteristics of primary and excess D&O, 38 percent rated breadth of coverage as the most important attribute of a primary D&O policy. When considering an excess carrier, the A.M. Best rating of financial strength was ranked most important by 35 percent, slightly ahead of breadth of coverage (32 percent).

The 2012 Directors and Officers Liability Survey, the 34th in a series of studies conducted by Towers Watson, was fielded online from Oct. 23 through Dec. 7, 2012. A total of 325 organizations that purchase D&O liability insurance participated in the survey, representing many industry sectors. The majority of respondents were large organizations holding total assets and/or revenues in excess of $1 billion.